Question

1. In class, we found that the only Nash equilibrium outcome of the homogeneous goods Bertrand duopoly model was p1 = p2 = MC. We then noted that if we changed some of the assumptions this result would no longer hold. Explain one assumption which will alter this result such that two firms competing on prices will have market power? 2. What is the Herfindahl-Hirschman Index (HHI)? You must provide the formula for full credit. Would the Competition Bureau be more concerned if the HHI for an industry were high or low? Why?

Answer 1

1)If the assumption ,that both are producing homogeneous goods changes to both are producing differentiated goods, the both firms will have market power.

HHI Herfindahl–Hirschman Index, show the competition in a certain industry.

HHI=10,000*(x1^2+x2^2+x3^3+......xn^2)

Where x1 is market share of firm 1 and xn is market share of last firm.

Higher HHI means there is less competition and lower HHI means lower competition.

So competition bureau would ve concerned if HHI is high.